The Board has adopted a policy in relation to the provision of non-audit services by the

Mr M A O’Leary retired as a member on 15 December 2006.

All committees are chaired by, and composed only of, non-executive, independent Directors, except the Safety, Health and Environment Committee, which includes the CEO as a member. Each committee operates under a specific charter, which is reviewed periodically by the Board and is available from the Corporate Governance section on the Company’s website.

The Chairman of each committee provides, and addresses, a written report together with the minutes and recommendations of the committee at the next Board meeting. The Chairman of each committee also, on an annual basis, presents an overview report to the Board of the committee’s activities for the preceding 12-month period.

AUDIT COMMITTEE

Members

Mr K A Dean (Chairman) Professor J Sloan Mr R M Harding Mr K C Borda

The external auditors, CEO, Chief Financial Officer (CFO), Manager Risk and Audit, General Counsel and Company Secretary, and Group Controller attend committee meetings by invitation.

Composition The Committee is required to consist of:

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no less than three members;

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only independent, non-executive Directors

who are financially literate;

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at least one member must have past employment experience in finance and accounting, requisite professional certification in accounting or other comparable experience or background; and

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at least one member must have an understanding of the exploration and production industry.

The Chairman of the Board is precluded from being the Chairman of the Audit Committee.

Role

The role of the Audit Committee is documented in a charter, approved by the Board. This charter was revised in December 2005 in line with contemporary best practice.

The primary objective of the Audit Committee is to assist the Board to fulfil its corporate governance and oversight responsibilities

38 Santos Annual Report 2006

related to financial accounting practices, external financial reporting, financial reporting risk management and internal control, the internal and external audit function, and compliance with laws and regulations relating to these areas of responsibility.

Specifically, the role of the Audit Committee includes:

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reviewing the effectiveness of the Company’s risk management and internal compliance and control systems relating to financial reporting;

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evaluating the truth and fairness of Company financial reports and recommending acceptance to the Board;

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reviewing the process adopted by the CEO and CFO when certifying to the Board as to the truth and fairness of the Company’s financial reports and that the financial reports are based on a sound system of risk management and internal compliance and control;

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examining the accounting policies of the Company to determine whether they are appropriate and in accordance with generally accepted practices;

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meeting regularly with the internal and external auditors to reinforce their respective independence and to determine the appropriateness of internal and external audit procedures;

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reviewing the performance of the internal and external auditors and providing them with confidential access to the Board;

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receiving from the external auditors a formal written statement delineating all relationships between the auditors and the Company and confirming compliance with all professional and regulatory requirements relating to auditor independence;

Company’s external auditor that is based on the principle that work that may detract from the external auditor’s independence and impartiality, or be perceived as doing so, should not be carried out by the external auditor. The Audit Committee Charter clearly identifies those services that the external auditor may not provide, those that may be supplied and those that require specific approval of the Chairman of the Audit Committee, in consultation with other members of the Committee.

It also provides that:

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the Board will not invite any past or present lead audit partner of the firm currently engaged as the Company’s external auditor to fill a vacancy on the Board;

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audit partners who have had significant roles in the statutory audit will be required to rotate off the audit after a maximum of five years and there will be a period of at least two successive years before that partner can again be involved in the Company’s audit; and

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the internal audit function, if outsourced, will be provided by a firm other than the external audit firm.

The Audit Committee provides the Board with a statement clarifying that the provision of non-audit services by the external auditors is compatible with the general standard of independence for auditors.

The nature and amount of non-audit services provided by the external auditors are detailed on page 52 of the Directors’ Statutory Report, together with the Directors’ reasons for being satisfied that the provision of those services did not compromise the auditor independence requirements of the Corporations Act.

A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act is set out on page 137 of this Annual Report.